Self-Funding and Reference-Based Pricing: An Overview

As health insurance premiums in the U.S. continue to rise, employers are constantly looking for new ways to reduce employee benefit costs. One solution that many employers are adopting is the use of self-funded health insurance and reference-based pricing. In fact, according to the 2013 Employer Health Benefits Survey from Kaiser Health, sixteen percent of covered workers at small firms and 83 percent of covered workers at larger firms are enrolled in plans which are either partially or completely self-funded. But what exactly does it mean to self-fund an employee benefit plan with reference-based pricing? This post will give you a general overview of how it all works.

Self-funded vs. fully insured health plans
First, employers need to understand the difference between self-funded and traditional fully insured medical plans. In a self-funded plan, the employer pays its employees’ medical claims directly without going through an insurance carrier, usually by using a third party administrator to administer the health plan by processing claims, issuing ID cards, addressing customer questions and performing other tasks. In a fully insured plan, the employer pays a fixed monthly premium no matter how low or high the employees’ claims are — premium funds not used to pay claims are not returned to the employer, except as required by the Affordable Care Act*. However, in a self-funded plan, the employer pays administration fees, stop-loss premium and actual claims costs.

What happens if employees have unusually high claims one year?
Stop-loss insurance, as its name suggests, “stops the loss” by limiting the amount of claims’ expenses the employer is responsible to pay per covered individual (“specific stop-loss”), as well as the total amount in claims (“aggregate stop-loss”), per plan year. Once the limits for specific stop-loss or aggregate stop-loss are reached, stop-loss insurance begins to cover the claims expenses.

Where does reference-based pricing come in?
Self-funded health insurance plans may use reference-based pricing, which is a pricing method that sets a maximum allowable charge for specific medical services. The Boon Group’s reference-based pricing plans in particular rely on referencing Medicare reimbursements for most of the plans’ repricing of claims, as well as other normative data. Rather than allowing medical providers to set prices, these reference-based pricing plans pay 120-160 percent of the reimbursement levels used by the Centers for Medicare and Medicaid (CMS), as well as other normative data. In this way, medical providers are still paid fairly for their services, but don’t have the power to charge the plan the exorbitant rates that major insurance carrier plans pay.

The opportunities for cost savings through reference-based pricing are significant. One employer who has successfully used reference-based pricing to reduce medical claims costs is the California Public Employees’ Retirement System (CalPERS). In 2011, CalPERS began implementing a self-funded, reference-based pricing model for elective hip and knee replacement proce­dures. The result was a 26 percent reduction in the average price paid and a cumulative two-year savings of $5.5 million.

See where and how your benefit dollars are being spent
Along with lower claims costs, reference-based pricing also allows employers to see where and how their benefit dollars are being spent. Self-funding means employers have access to de-identified information pertaining to claims’ costs, and can spot trends in employee health costs, allowing employers to be more proactive when planning for future enrollments or making benefit package modifications. This, in turn, allows employers to create a long-term financial strategy for their employee benefit plan. In a fully insured plan employers pay a monthly premium that does not vary with claims costs, but with a reference-based pricing self-funded plan any unused funds remain in the plan’s reserves to cover future claims for employees.

While it may not be the right fit for every employer, the potential for cost savings and greater health care price transparency are two of the biggest reasons to consider self-funding with reference-based pricing.

This guest post was written by Silvia de la Peña, Content Marketing Associate at The Boon Group. She can be reached at

*Under the MLR provision of PPACA, health insurers in the large group market are required to spend at least 85 percent of premium revenue (80 percent in the small group and individual markets) on reimbursements for clinical services or activities that improve health care quality, or pay a rebate to policyholders.

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